Is it better elsewhere? That’s a question that must be answered today by a number of British residents, most of whom have been able to benefit from a tax regime that does not apply to permanent residents (by being beneficiaries of the so-called non-domiciled regime).
The United Kingdom has announced that its hitherto favourable tax regime for wealthy businesses and individuals will change, and that, as a matter of priority, it will abolish the existing tax exemption on non-territorial income and will increase taxation on capital gains to the level of ordinary income tax. The moment of truth will come when the Autumn Budget is announced on the 30 October.
Attractive tax environments across Europe
How does this affect Estonia? As far as recent years are concerned, professionals who are active in the field of taxation and/or who help investors and individuals choose a suitable place for their families to live agree that the most attractive environments are in countries that can offer stability in terms of taxation and legislation.
Since the geographical, climatic, political and security environment is not stable and there are no signs that it will stabilise in the near future, an environment capable of ensuring legislative stability is sought. For example, such countries provide assurance that a property will belong to its owner tomorrow, where social agreements are stable and where taxes are not a subject to the whims of daily politics.
Of course, other factors such as good opportunities for travel, and access to the best education and culture are also important when making a choice.
Global movement of investors
In recent years, there has been a noticeable movement globally, with investors and money looking for either a new or at least an additional opportunity for themselves. International entrepreneurs are both parking their capital in countries that they believe can provide stability and moving there themselves.
The UK’s proposed legal changes have given new impetus to intra-European migration this year.
What can Estonia offer its residents and what can we offer to those who would consider coming and living here? Will we be able to ensure legislative and fiscal stability? Is Estonia attractive? In order to answer that, we could look at what other European countries are offering at the moment, and where the biggest influx of private individuals and related capital is happening. This is Switzerland (once again), Italy, Spain, Portugal, Malta and Cyprus.
Switzerland offers stability in terms both of laws and their interpretation, access to the best international education, and a tax regime that is favourable to the wealthy. Since the Swiss system is cantonal, the differences between the cantons are not considered in this opinion, but in the field of taxation Switzerland mainly offers two attractive features – a lump-sum income tax and non-taxation of capital income at the level of a private individual. A lump-sum income tax could also be called a spending-based tax and is applied in certain cantons and only to those persons who do not work in Switzerland or are not Swiss citizens. Costs are estimated in aggregate, and an amount calculated as a percentage of the total cost estimated is charged as a tax. A simplified example would be if the canton estimates that a person’s annual cost of living is CHF 1 million and the average cantonal income tax is 20% (combined federal, cantonal and communal), then the tax payable is CHF 200,000. To this is added the property tax, which is calculated as a percentage of the 20-fold multiplier (0.5% 20 million), which in our example is CHF 100,000. In addition, social tax is payable, which is about CHF 25,000 per year. Thus, the final annual tax expense may be CHF 325,000.
If the income earned outside of Switzerland is significant and the volume of assets is considerable but cost-of-living standards are moderate, then what Switzerland offers seems like a pretty good deal.
What does “bella Italia” have to offer? Italians realised that if they wanted to revive their economic environment and, offer something modern in addition to their fascinating history, then they would have to make sure that more wealthy people would choose Italy as a place for living and entrepreneurship. This, in turn would invigorate the local economy, with demand for real estate, design, gastronomy, international schools, etc.
Italy’s taxes had been high for quite some time which eventually began to have a noticeable impact on economic growth. Enterprising and wealthy people did not come to the country, and many younger people left. Italy sought innovations and introduced a regime under which wealthy and economically active people moving to the country would not be taxed on their foreign sources of income, and in return, Italy would ask for a lump-sum tax of about 100,000 EUR per year. It is a classic example of territorial tax regime.
You can apply for the regime on a tax basis for a period of 15 years. Income earned in Italy is subject to normal taxation. Of course, there are various anti-abuse provisions that need to be kept in mind if the maximum use is to be made of it.
Despite the line in My Fair Lady about how Spain is experiencing terrible rain, the tax sun is shining there on Mr Higgins. Spain has a federal system, meaning different regions can have different rules. On a large scale, however, Spain uses the so-called “Beckham law”. This means that under a special scheme, incoming high-paid or otherwise wealthy people can apply for a separate tax regime, which applies for a total of six tax years.
The regime has two advantages: firstly, it is possible to have a flat income tax of 24% applied on income from employment earned in Spain, up to EUR 600,000 per year (think footballers, for example); and secondly, the regime is territorial. Thus, capital gains and other income earned by a person outside Spain are not subject to taxation in Spain.
The Spanish tax regime is very attractive to economically active people and entrepreneurs. This special regime is applied not only to the wealthy, but to anyone who is commercially engaged and satisfies the minimum requirements for the regime. The aim is to get people to come to Spain who want to start or continue doing business there.
Portugal has been a favourite location for many Estonian tax advisors, their clients and, according to the media, many real estate investors who see the attraction in local real estate development. Portugal previously had a tax regime which attracted incoming wealthy people. Otherwise patient and peaceful locals, who in recent decades have become sensitive to societal questions, were disturbed by the fact that the rich have their own laws – that they pay less taxes and drive up local property prices so that it is difficult for the average working Portuguese resident to afford a place to live in Lisbon. Despite the fact that the increase in property prices was more due to the application of another regime – the golden visa regime – the Portuguese public blamed both approaches. Even though the old tax regime, which guaranteed so-called territorial taxation, does still apply to those who previously obtained authorisation, recently it has been reformed and the old regime has come to an end.
As a result of this reform, there is now a new system, the so-called tax benefit system in the field of scientific research and innovation. A list of professions has been created that support science, education and innovation. These are now regulated areas and regulated professions. Individuals must register with the relevant professional authorities and obtain proof that they are really engaged in this field and that they qualify. The regime seeks to contribute to the economic development of the country. Qualifying persons are subject to 20% income tax on their income earned in Portugal, and income earned on sources outside Portugal is tax-free.
Two small island nations are particularly lovely in creating an overall friendly and tax-friendly environment. In addition to a favourable business environment and generous corporate taxation, Cyprus and Malta also welcome financial investors, business owners and otherwise wealthy, famous and active people.
The Cypriot economy has been stable over the past decade. What makes this particularly interesting is that it is a rocky island state, about 36% of which is occupied. Given the alarming developments and, more recently, the escalation to war in nearby Lebanon, Palestine and Israel, it is amazing how Cyprus has managed to maintain stability and attractiveness. Among other advantages, Cyprus offers tax residency to persons who stay in Cyprus for at least 60 days but do not stay in any other country for more than 183 days a year and who are not considered by any other country to be tax resident there. Such a regime is very attractive to those who move between countries often, allowing them to be a tax resident in Cyprus where there is attractive taxation but where a constant presence is not required. In addition, Cyprus also has its own non-domiciled regime. The non-domiciled regime confers the advantage that interest and dividends earned outside Cyprus are not taxed.
Potential for Estonia’s tax landscape
How can we, in Estonia, ensure the attractiveness of our tax environment? As for the first-round relocations, we’re late. The abovementioned countries started doing their homework a long ago and have also reached certain social agreements.
Estonia has extremely beautiful nature, we have high culture to offer, we have clean air and clean water – isn’t that enough? It’s definitely a good start.
From a fiscal point of view, we have a vague corporate income tax regime. Estonia has had an attractive deferred income tax regime, with the tax rate having been optimal. Apparently, all professionals understand that this regime is a bit out of date, and there is also uncertainty about how things will continue. The first signs of its crumbling are already visible, with the proposed annual defence tax.
The personal income tax rate will also rise. By 2026, it will be 24% of all world revenue. Fortunately, the tax exemption for dividends received is still valid. Several private individuals have portfolio investments and capital income, which would be fully taxed in Estonia if the persons are Estonian tax residents. In the example of Switzerland given at the beginning, if a person has, for example, an income of 1 million CHF and their living expenses are also 1 million CHF then in Switzerland their tax burden would be about 325,000 CHF. In Estonia, if the income is 1 million EUR and expenses are 1 million EUR, then 240,000 EUR would have to be paid in 2026. However, if the taxable income is 2 million EUR then the same person in Estonia would have to pay 440,000 EUR and would no longer be able to rely on any differences.
Therefore, everything is relative, but we could think about imposing a lower tax burden on wealthy and economically active people moving to Estonia for a certain period, for example, or allowing large deductions on donations to science, culture, medicine or social welfare.
